The protection business

Police investigated 1.35m crimes in the first nine months of 1998 a rise of 22 percent over 1997. This is good news for sellers to China's fast-growing security equipment market. While there are no official statistics, industry insiders estimate that the market has been expanding annually at more than 25 percent in recent years.

Infrastructure investment in airports and highways and the expansion of retail and banking services are also creating new customers who demand the latest high-technology security products such as closed-circuit television (CCTV) matrixes, high-speed dome cameras and electronic tagging. Meanwhile domestic users of security equipment are beginning to consider supplementing initial purchases of iron bars and iron doors with more sophisticated alarm systems.

Faced with high duty rates, importers have formed close ties with well-connected Chinese distributors able to navigate the complex customs maze. Others are seeking to lower costs and combat counterfeiting by setting up manufacturing plants within China. There are also indications that highly restrictive regulations governing the security services market may be about to be liberalised.

The security equipment market first began to take off in the early 1990s when growing demand for security products and regulatory changes produced opportunities for the first privately owned Chinese firms. At the same time, existing state equipment manufacturers were corporatised, giving them added flexibility in terms of managerial autonomy and business scope.

The growth of the sector was extremely rapid between 1990 .and 1994, when prices for certain types of security equipment doubled or even tripled. Since 1995 the growth of the market for low-end security products has levelled off. The wider choice available to purchasers of equipment placed increasing competitive pressures on prices.

The profit margins for some security equipment firms fell to as low as three to five percent, leading them to seek the fresh inputs of technology and know-how required to maintain revenue growth. The involvement of foreign firms in this process began to grow, helping to develop a market for high-end security, products focused on affluent urban areas along the southern and eastern coastlines.

Regional industry analysts estimate that the Asia Pacific security industry market has grown at an average annual rate of 11 percent since 1989. The value of this marketwas approaching US$700m by the mid-1990s, according to industry analysts. In China the sales growth rate has been well above the regional trend. Analysts consulted by the US Consulate in Guangzhou estimated that the China market will have registered growth of between 15 and 20 percent during the second half of this decade.

Breaking into the bank market
Some manufacturers, however, feel that the Asian regional economic malaise will begin to affect China sales this year. UK-based Dedicated Micros, which sells CCTV multiplexes and cameras through a Shenzhen based distributor, has experienced 25 percent increases in China revenues in recent years. "We will be lucky to get 10 percent growth this year," says Mr. Raymond Cheong of the firm's Singapore office.

Japanese firms are the biggest importers of security equipment into the Chinese market. Well-known Japanese brands include Panasonic, Sanyo, JVC, Yamano, Delta, Avenir, Videosonic and Nacano. The US and Taiwan rank second and third respectively in the sector while EU, Canadian, South Korean, South African and Israeli firms are also developing substantial China businesses.

Banks are major users of security equipment. The increase in the number of bank robberies in recent years has led some branches especially in southern China to spend well in excess of US$1m on security equipment. The value of such investment is shown by incidents such as the one wherethieves in Panyu city in Guangdong province attacked a bank truck and made off with Yn15m (US$1.8m). The use of guns by criminals is also an increasing problem. In 1995, for instance, Guangdong police arrested more than 1,700 people for illegally selling and distributing firearms.

Equipment used by banks includes CCTV and armoured trucks as well as bulletproof glass, cash boxes and clothing. Most equipment used is manufactured in China and domestically produced equipment is becoming increasingly sophisticated. China's first bank safe accessed through face-recognition technology, developed by scientists in Harbin Polytechnic University, was unveiled in December 1998.

The use of imported products is also becoming more common. For example, the Sanshui branch of the China Industrial and Commercial Bank and Bank of China branches in Zhongshan, Shenzhen and Hainan all use Panasonic CCTV systems.

Shoplifting threat
Retailers are also major consumers of security equipment, much of it imported. Half of the members of the Guangdong Chain Operations Association were reported in 1995 to be using convex mirrors, while 10 to 20 percent used CCTV and electronic labelling systems.

US security firm Sensormatic is the world's largest supplier of anti-shoplifting devices, such as electronic article surveillance which include ‘tags' and detection pedestals connected to alarms at store exits. It has more than 350,000 electronic article surveillance systems installed worldwide and has recently supplied Wal-Mart and Carrefour's China stores. The firm, which also makes CCTV systems, has supplied equipment to Shanghai's new airport in Pudong as well as numerous banks and government institutions.

"The fact that we sell to a lot of official organisations means that we have to deal with a lot of administration. They are very demanding, but I mean that in a positive way. They want to make sure that they get the right equipment and that it works," says Mr. Ron Premuroso, president of international operations at Sensormatic. The Florida-based firm now has "a very significant base" of China sales which have built up from almost nothing in the past four years.

"Taxes on imports are a lot higher than in other places. We are investigating the possibility of setting up a manufacturing joint venture in China with a Singapore Chinese firm," says Premuroso. Another concern, he says, is the threat of piracy which has led the firm to take ‘special measures' on the China market to protect its trademarks and patents.

Equipping new airports
China's airport building boom has also created demand for security equipment. There are now more than 130 regional civilian airports throughout the country, most of which make use of CCTV and X-ray equipment.

In Guangdong alone, new airports have opened in recent years at Beihai, Zhuhai, Guangzhou and Shenzhen. German firm Heiman has recently supplied X-ray equipment to Macau's new international airport. Other leading brands of foreign X-ray equipment selling in China are France's Euroscan, Canada's Corrigan, and EG&G and Rapiscan from the US.

Fiscal' is the leading Chinese X-ray security system and is widely used. While it is 10-to-15 percent dearer than other Chinese brands, it is cheaper than imported German and US products which have to pay a six percent duty on lop of 17 percent VAT.

Customs posts, airports and railway stations are also in the process of upgrading their X-ray equipment. One of their aims is to combat the trade in illegal drugs from Southeast Asia bound for North America and Europe. These drugs are increasingly being channelled through Chinese staging posts.

Airports, government buildings, banks and railway stations are also major users of CCTV equipment. The Hong Kong branch of Philips CSS has recently supplied equipment to Beijing airport. Philips also sells to China security monitor matrixes linked to inputs such as cameras and microphones. US-based firm Vicon, which manufactures CCTV components in co-operation with South Korean firm Chun Shin, signed a contract with Xiamen airport in 1997.

Pelco, headquartered in California, sup-plies CCTV control systems and peripherals such as high-speed domes to the Chinese market. The firm uses a master distributor called Tung Po based in Hong Kong and has worked on monitoring equipment for about two dozen regional airports in Sichuan, Hunan and Guangzhou, as well as dozens of highways. The firm is also a supplier to multinationals such as Honeywell, Johnson Controls and Thom Security and many leading building automation firms.

"The fastest growing market is in infra-structure, including monitoring systems for highways, railways and airports, which rep-resents about half of our China business," says Mr Bill Rigsby, vice president for sales and marketing of Crockett International which handles Pelco's China sales. "Infrastructure customers are different in that we work more closely with government end-users, committees and local firms involved in installation work."

The firm, which has been involved in the China market for about six years, has recently come across examples of counterfeiting of some its more mechanical parts. "This is something which we have to tolerate [in China]. There is not much we can do about it apart from continuing innovation, developing a new generation of products and possibly establishing some local manufacturing," says Rigsby.

Pelco's global sales are worth between US$100m and US$130m and China represents about one-third of its Asia Pacific sales. The China market has been growing at between 30 and 35 percent in recent years and Rigsby expects growth of 45 to 50 percent this year.

In 1997 there were more than 140,000 fires recorded in China, killing 2,722 people and causing Yn1.54bn in damage. Many are caused by faulty electrical wiring. The bulk of heavy fire-fighting equipment such as fire trucks and support vehicles is purchased by local fire bureaux: In larger cities there may be several branch fire bureaux. Individual factories are required to maintain basic fire-fighting equipment. Special regulations apply to certain types of factories, as well as nightclubs and restaurants.

Industry regulation
Unlike in other industries, local firms manufacturing security equipment are not under the control of an industrial bureau. This is because of the comparatively recent development of the industry and the fact that it does not fall naturally into the traditional industrial bureau statistical base. Instead, the industry is administered by the Office of Security Equipment and Technology within the Ministry of Public Security. The office, which also exists within provincial and municipal Public Security Bureaus (PSBs), is responsible for monitoring the quality of security products. Many import contracts are also subject to approval on technical and quality standards by local PSBs.

The office is supposed to examine which products are ready for market and which companies are permitted to produce and sell them. In practice, poor management and regulation have often compromised product quality and safety. There are now more than 300 firms dealing in security equipment in China ?the Iargest number located in Guangdong province.

Some cities have taken a proactive approach to raising product quality. Shenzhen set up a specialised market for security and safety equipment in March 1997. The market was backed by the Shenzhen PSB, which ordered all security equipment used in local construction projects to be purchased there.

Fire regulation tightens
Fire control equipment is fitted during the construction of new buildings, which must conform to a variety of local regulations. Regulations have been tightened in recent years following extensive media coverage of fires in foreign-funded ventures. One notorious fire in a Shenzhen joint venture resulted in the deaths of 87 workers in 1993. The Hong Kong proprietor was sentenced to two years in jail for ignoring fire safety regulations. The following year a fire in a Xinjiang cinema killed 325 people, including 288 children.

The biggest Chinese producers of smoke detectors are Beijing Zhongan Electronic Equipment and Xian-based 262 Factory. The latter, which has been producing smoke detectors since the 1970s, has formed a joint venture with a Swiss firm. While some smoke detectors manufactured in Guangdong province are exported to the US, China also imports smoke detectors primarily from Japan, the US and Switzerland.

The market for equipment protecting residential properties is also closely tied to new building construction. But families with increasing incomes are also purchasing security equipment as home improvements. Iron doors and bars are often the first upgrade for many families. In 1995 there were 45 enterprises in Guangdong province manufacturing iron doors with intercoms. Well in excess of 30,000 residential buildings there are protected by such equipment.

Many public buildings already have windows and balconies fortified with iron bars. But the drawbacks of these are increasingly recognised. There have been cases of rusted iron bars breaking loose and injuring passing pedestrians and bars are also potentially lethal in fires where they prevent escape.

Domestically produced iron doors cost between US$100 and US$150 and the cost of fitting iron bars is about US$10 per square metre of window area. Many families in southern China already spend about US$600 on fitting iron bars and doors, which is roughly the same as the price of alarm systems marketed by foreign firms. Sales of imported integrated alarm systems have so far been hindered by a lack of familiarity with the products. The cost of installing electric iron doors with an intercom at the main entrance is about US$1,500.

Many newly developed apartment complexes share centrally managed security systems manned by security guards. These are often still preferred to more effective central control systems, primarily because hiring security guards is still relatively inexpensive. The builders of new apartment complexes often delay the fitting of central control systems because they are worried that the installation of expensive technology will raise rents to a prohibitively high level.

Mr. David Young of UK-based Group 4 Technology believes that rising labour costs will be a key element in increasing the viability of its products in China. "At the moment it is often cheaper to have a man on the door," he says. The firm, which in the medium-term is hoping to service the security needs of China-based multinationals, is currently working on translating into Chinese the software associated with its card-based access control systems.

"China is one of our biggest, if not our biggest, export markets," says Ms Claire White, export sales executive at Pyronix. The UK-based firm sells to China alarm systems incorporating passive infrared receivers and ‘double technology' detectors (using infra-red, microwave and sound detectors) connected up to control panels. The products are sold to domestic light industrial customers via a distributor with offices in Hong Kong and the Mainland. Mr Yan Jianguo, head of Inter Electronic Technology (Shenzhen) – a major distributor of foreign security equipment – tips anti-burglar devices targeted at domestic users as the fastest growing product category in 1999.

Distributor connections
Many distributors of security equipment in China have special relationships with local public security bureaux. Commonly, these distributors are not licensed to import foreign equipment and so have to deal with specialist import agents. The military and customs links of many of these importers enable them to cut special deals on reduced customs duties – sometimes avoiding paying import tariffs altogether.

Philips makes use of import agents in its China trade. "You need to have a way to sort out the problem of high import taxes," observes Man Tang of Philips CSS in Hong Kong. "There is a very strict control on purchases of VCRs and monitors, so import tax is very expensive," confirms Yan of Inter Electronic Technology, the Chinese distributor of Philips' VCR and monitor products.
Inter Electronic Technology (IET) also handles distribution for leading international clients such as Ademco, BRK and Pyronix. US-based Ademco is the brand leader in the China market for imported centrally controlled alarm systems and has sold about 1,000 such systems to date mainly supplying retailers and banks. Its China sales grew by 50 percent last year to exceed US$Sm. IET also distributes for BRK, the biggest-selling importer of smoke alarms and Pyronix, the second-best selling brand of imported detector products.

Other international firms represented by IET include UK-owned Baxall (the largest European manufacturer of CCTV equipment with China sales of about US$1.6m), Mitsubishi (time-lapse VCRs) and Japan's Star C ‘dome' cameras).

Parallel import costs
The erosion of profit margins resulting from competing distributors' handling the same brand is a, common problem. "If more than one distributor promotes the same brand, it will cause the short life of the product," says Yan. "Very seldom can [distributors] make the products they represent into famous brand products since most of them focus only on short-term profit rather than long term business," he notes. IET, which employs about 100 people, has sales offices in 13 cities throughout the country.

On some large projects, security equipment consultants can be of value. UK-based Task International provides liaison between Chinese users of security equipment and foreign equipment manufacturers.

Task is currently working on a deal involving a large Chinese state-owned firm importing equipment for gates and cameras, and neural systems for fences via a satellite link. Task's John Bartaby-Russell stresses the importance of contacts. "The biggest problem is finding the right person to talk to who is not going to demand too large a brown paper envelope," he says. "If you talk to a middleman, the costs are going to escalate."

Yan agrees: "For many years there will still exist the problem of `half-business, half-relationship' which makes many foreign investors give up their investment plans. One who does not understand guanxi will not have a successful business here."

Service sector opening?

While foreign firms are active in supplying security equipment, there is as yet no foreign investment in the security service sector which responds to alarm calls from end-users, such as banks and supermarkets. "There are no private companies running burglar alarm centre businesses, with all businesses operated and controlled by the government," says Yan.

Hong Kong-based Jardine Securicor's China business is currently limited to provid-ing cross-border cash delivery services to banks and retailers in Shenzhen, explains the firm's China director David Zhang.

While foreign involvement in security services is largely limited to providing train-ing to installers and end-users of security equipment, Zhang believes that "the govern-ment is currently carrying out feasibility studies into opening up the security services industry". Alarm and response services could be one area where management expertise is used to raise standards. In some areas the size of the industry is considerable. Guangdong province, for instance, has already installed 210 alarm centres connected up to 33,000 end users "Currently banks often have in-house security forces which in many cases have licences to carry guns. But this approach is very expensive and security forces will be rationalised in future to make them more efficient," says Zhang.

As with many other industries beginning to open up to foreign investment, Zhang believes that fresh legislation would most likely permit experimental joint ventures, perhaps beginning in "medium-sized coastal cities". While Jardine Securicor is now "exploring the possibilities" of such a joint venture, one problem is that PSBs would not be permitted to participate in their current form. Potential joint venture partners may include newly-corporatised security companies, but the management of these new firms would remain under control of local PSBs.

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